Richmont delivers double whammy in Quebec

Richmont Mines (RIC-T, RIC-X) has found itself in a tough spot, with shares sinking to a new 52-week low after taking the Francoeur gold mine offline and scrapping its exploration efforts on the Wasamac gold property, both near Rouyn-Noranda, Que.

Francoeur is undergoing an estimated four-month closure process, after commercial production was halted on Nov. 30, mainly due to high production costs. The closure impacted roughly 115 employees, of which 35 were temporarily retained to assist with the decommissioning. 

“Francoeur’s closure comes unexpectedly, but in our view it was the right decision, taking into account the low realized grades, difficult mining conditions and labour issues,” CIBC analyst Kevin Chiew writes in a note. These factors contributed to the mine’s elevated costs.

Francoeur, Richmont’s first mine, began producing in 1991, before closing in 2001 owing to unfavourable gold prices. It was only this August that Richmont put Francoeur back into action, after taking a non-cash, after-tax, $28-million writeoff in July. This resulted from Richmont lowering the mine’s production guidance following a revised reserve and resource estimate.

In its first two months of commercial production ended Sept. 30, Francoeur generated 1,800 oz. gold from 16,023 tonnes grading 3.61 grams per tonne — 24% below the mine’s updated reserve grade. Cash costs came in at US$1,608 per oz.

In early November, the company’s president and CEO Paul Carmel blamed Francoeur’s third-quarter performance on start-up issues and a tight labour pool for experienced underground miners, adding that the company would improve productivity and recovered grades at all of its operations.  

On Nov. 29, Carmel said the company regrets not making that happen at Francoeur.

“Given the ongoing high operating costs at Francoeur, and management’s inability to foresee marked improvements in the future, we are obliged to make the difficult but responsible decision to close the mine,” he said, adding that the Montreal-based firm would try relocating many of the affected workers to its other operations.  

With the closure, Richmont estimates taking an $11 million to $13 million pre-tax writeoff, of which only $4 million to $5 million would be in cash and related to employee severance. The majority of the writeoff will be recorded in the fourth quarter of 2012.

The producer says it has several ways to recoup a substantial amount of the closure costs, including deploying equipment to its Island Gold and Beaufor gold mines in Ontario and Quebec.

Despite closing a mine, the company expects to meet its full-year guidance of 65,000 oz. gold, but has trimmed its 2013 target to between 65,000 and 70,000 oz., from 85,000 to 95,000 oz. previously.

At the Wasamac property, Richmont will carry on with technical and permitting efforts throughout 2013, but has deferred any other exploration and development work, as the project doesn’t appear economic in the current environment.  

Richmont came to this conclusion after contemplating several scenarios to improve bleak returns that were outlined in a preliminary economic assessment (PEA) on the project released in late March. The PEA indicated Wasamac has a 7% internal rate of return (IRR) and a $71-million net present value (NPV), using a gold price of C$1,350 per oz. and a 5% discount. If a larger 8% discount rate is applied, the NPV falls to negative $32 million.

In an attempt to lift Wasamac’s returns, Richmont looked at scaling down the 6,000-tonne-per-day operation to 3,000 tonnes a day. While this cut start-up capital, the IRR improved only slightly. It also considered only exploiting Wasamac’s high-grade area and shipping the ore to its Camflo mill, but that also failed to brighten prospects.

With less on its plate, Richmont aims to redirect capital to its assets that offer higher returns.

“The main focus of the company rests on Island Gold, where we believe RIC can generate the most value. These latest developments with Francoeur and Wasamac are certainly disappointing, making the success of Island Gold even more important,” Chiew comments, having revised his 12- to 18-month price target to $5 from $6.

On Nov. 30 — the first trading session after Richmont announced the mine closure and project suspension — shares tumbled 26% to $2.82, and kept sliding. On Dec. 4, it hit a new low of $2.69, before closing at $2.86. Richmont reached a 52-week high of $12.98 on Jan. 31, 2012.